APPEAL from the Circuit Court of the United States for the Northern District of Ohio. The facts are stated in the opinion of the court.
The opinion of the court was delivered by: Mr. Justice Miller delivered the opinion of the court.
Mr. A. K. Dunn for the appellants.
Mr. N. N. Leyman, contra.
The appellee brought his bill in chancery in the District Court for the Northern District of Ohio, as assignee in bankruptcy of Hubbard Colby, to set aside and avoid two mortgages, made to appellant a short time before proceedings were commenced against Colby as a bankrupt. The District Court rendered a decree against the assignee, which was reversed on appeal to the Circuit Court, the latter holding the mortgages void under the bankrupt law. From that decree this appeal is taken.
Mrs. Barbour was the widow of Justus S. Barbour, and guardian of his minor children, and Colby, the bankrupt, was administrator of said Barbour's estate. He was the brother-in-law of Mrs. Barbour, whose husband had been dead many years; and Colby, after administering the estate, had retained in his hands about $24,000, which he had never paid over to her, as he should have done.
Colby was a man of reputed wealth and the owner of much valuable real estate, and it is obvious from the testimony that Mrs. Barbour reposed unlimited confidence in him, and relied on him for the general management of the estate. On the eleventh day of June, 1873, Mrs. Barbour received a notice from the probate judge to make a settlement, showing the condition of her accounts as guardian, and to file a new bond. She filed a new bond, but did not make the settlement. On September 20, of the same year, she received another notice, requesting her to file a statement of her account the next day. She swears in her testimony that she handed both these notices to Mr. Colby, and requested him to attend to the affair, and that she relied on him entirely in the matter. On the first day of October, Colby made two mortgages on distinct parcels of real estate, for the purpose of securing his indebtedness to Melissa A. Barbour, in her right as widow, and as guardian of the minor children of her husband, in the sum of $22,722.20, then in his hands, as administrator of the estate of Justus Barbour.
Colby was adjudicated a bankrupt on a petition filed Nov. 3, 1873.
The testimony on which the decree was rendered is very voluminous, and need not be critically examined here. We think three propositions of fact are so clearly established that there can be little doubt about them. They are:––
1. That when Colby made the mortgages to Mrs. Barbour he was insolvent, and knew he was in that condition.
2. That he intended by those mortgages to give Mrs. Barbour a preference over his other creditors, by securing the debt due her and her children from him, as administrator of Barbour's estate.
3. That Mrs. Barbour did not know, nor have reasonable cause to believe, that Colby was insolvent when the mortgages were made and filed for record.
It will be perceived that the conveyances which are here in question were made, and the proceedings in bankruptcy were commenced against Colby, before the date at which the Revised Statutes became the law, and before the act of 1874, amendatory of the bankrupt law, was passed. The validity of these mortgages, then, so far as they are affected by the bankrupt laws of the United States, is to be determined by sect. 35 of the original act of March 2, 1867, c. 176, 14 Stat. 534. So much of that section as relates to the question before us reads as follows:––
'SECT. 35. And be it further enacted, that if any person being insolvent, or in contemplation of insolvency, within four months before the filing of the petition by or against him, with a view to give a preference to any creditor or person having a claim against him, or who is under any liability for him, procures any part of his property to be attached, sequestered, or seized on execution, or makes any payment, pledge, assignment, transfer, or conveyance, of any part of his property, either directly or indirectly, absolutely or conditionally, the person receiving such payment, pledge, assignment, transfer, or conveyance, or to be benefited thereby, or by such attachment, having reasonable cause to believe such person is insolvent, and that such attachment, payment, pledge, assignment, or conveyance is made in fraud of the provisions of this act, the same shall be void, and the assignee may recover the property, or the value of it, from the person so receiving it, or so to be benefited.'
The act of making these mortgages by Colby, though he knew that he was insolvent, and knew that he was preferring Mrs. Barbour as a creditor at the expense of others, is not forbidden by the common law, and is not a violation of the statute laws of most of the States of the Union. Nor is it an act for bidden by any general rule of morals or of abstract justice. It was in fact a meritorious act, aside from the positive rule established by the bankrupt law. He had long had this money of a confiding widowed sister-in-law and her orphan children, and while holding it in a fiduciary capacity he had used it for his own purposes. He saw her called to account for it by the Probate Court, and knew he was unable to refund it. He also saw the gulf of bankruptcy before ...